INTERVIEW - EU CO2 Market May Yield More Windfall Profits - S&P
Date: 24-May-06
Country: UK
The European Union carbon market is supposed to drive cuts in emissions of heat-trapping carbon dioxide (CO2) by charging companies if they exceed a certain quota of permits, which they have so far received for free.
The European Commission said last week that countries last year handed out more permits than industry needed, undermining the green aims of the scheme and prompting calls to auction some of the permits in the next phase from 2008 to 2012, rather than hand out them all out.
But under European Commission rules countries can only auction a maximum of 10 percent of their permits in 2008-12, which will not be enough to wipe out windfall benefits, Kernan said on Tuesday.
"The fact they still get 90 percent for free is the more pertinent figure," he said.
"The more allowances that are auctioned the more adverse the impact on the sector, but we are confident that there will be no credit rating issues, given the high level of utilities' profits, and that firms could continue to make windfall profits."
The Netherlands said on Tuesday that from 2008 it would auction 10 percent of the permits it had previously handed to its electricity sector, to try to tackle windfall profits.
Member states have until June 30 to submit to the European Commission their draft plans for 2008 to 2012.
Power firms in liberalised markets in Britain, Germany and Scandinavian countries have made windfall profits both because they get emission permits for free and because they can pass on to energy consumers the inflationary impact of the carbon market on power prices.
High carbon prices push up power prices and vice versa, because much power is generated by burning high carbon fossil fuels.
A surge in EU CO2 prices last year was cited as one of several triggers for a significant rise in European power prices.